Studying the interdependence of contractual and operational flexibilities in the market of specialty chemicals

This paper focuses on the market of specialty chemicals and deals with the joint investigation and valuation of contractual and operational flexibilities from a manufacturers' point of view. In this market, customized services related to research, development and manufacturing of chemicals, intermediates and active pharmaceutical ingredients are offered to a small number of customers. Traditionally, customers are granted a large degree of freedom with respect to demand quantity and time exposing the manufacturer to high uncertainty and financial risk. Using a model-based approach we quantify the effect of this contractual flexibility and relate it to the manufacturing flexibility concerning capacity allocation. Through the valuation of these flexibilities we provide first insights for the manufacturer on which customer requests to accept, how to set up the associated contracts with the customers and how to allocate capacity for a given portfolio of products. (C) 2008 Elsevier B.V. All rights reserved.